Labour has launched a major review into the party's structure in an attempt to reduce its £27m debt.

The party is looking to make spending cuts of 20% which are likely to lead to some job losses.

The review will also address a political funding probe by Sir Hayden Phillips which may rule out backing from wealthy benefactors at elections.

Police are carrying out an inquiry over allegations that four Labour donors were later nominated for peerages.

'Challenging position'

Labour has started to consult its staff, unions and other interested groups about what a senior Labour figure calls "radical restructuring".

A party spokesman said any cuts would not affect its ability to fight vigorous campaigns in local elections next year in England and in the devolved governments.

The level of Labour's debt was revealed last month by figures submitted to the Electoral Commission.

Labour chairman Hazel Blears conceded that the party was in a "fairly challenging financial position".

The Conservatives were in the red by £18m, and the Liberal Democrats by just under £300,000.

Police launched an investigation into the funding of political parties after four Labour backers at the last general election - Sir David Garrard, Sir Gulam Noon, Chai Patel and Barry Townsley - were nominated for peerages.

The prime minister has said no-one in the Labour Party has sold honours in return for financial backing to his knowledge.

Sir Hayden, who was asked by ministers to review the funding system following the allegations, is due to report his recommendations by the end of the year.